Why Pay TV Providers Are Under Investigation

The Department of Justice will not comment, but sources confirm that it is conducting a wide-reaching antitrust investigation into cable and satellite TV companies.

None of the companies will go on the record, but sources tell me the companies under investigation are hoping to work with the DOJ to narrow the scope of the investigation, in which the companies involved will have to turn over as many as half a million e-mails from just one executive.

What does this mean for cable companies? It re-introduces regulatory uncertainty, which is never great for stocks.

Bernstein analyst Craig Moffett says he expects the investigation to have two effects—1) accelerating the shift to usage based pricing for broadband, and 2) slowing the pace of innovation and reinforcing “the closed nature of the cable infrastructure.” But this investigation is quite unlikely to break up the current pay TV model.

The primary question: are they inappropriately limiting competition from online video services like Netflix and Hulu by capping the amount of data/videos subscribers can stream every month?

This was prompted by Netflix CEO Reed Hastings complaining on Facebook that Comcast applied data caps inconsistently and unfairly—not counting viewing of its own Xfinity streaming video against those caps, while counting viewing of Netflix and Hulu.

This raises the question of ‘net neutrality,’ the idea of treating all traffic equally, which the FCC codified in its “Rules for Preserving a Free and Open Internet,” which were released in September 2011.

The “Open Internet” order and other comments from FCC Chairman Julius Genachowski have endorsed usage-based pricing. Variable pricing could be bad for Netflix, by limiting how much people stream.

The other question. Is an even bigger one: Is mandating a cable subscription for online access to content—and bundling content—anti-competitive? Bundling channels is at the core of the business models of both cable/satellite TV companies and the media companies which sell provide them with content.

‘Authentication’—the idea of logging in to access “TV Everywhere”—is how content and distribution companies will ensure consumers don’t cut the cord. If this is prohibited, the TV industry’s business model would be threatened.

But if bundling/authentication are called into question—the investigation may not be far-reaching enough. The decision to bundle and require TV subscription to access content online lies largely with the content companies.

One source close to the industry says “by not including programmers—companies like Disney, News Corp, CBS, etc.—on the list of companies being investigated it’s unlikely that they’ll uncover the whole story.”

Comcast is the parent company of NBCUniversal, of which CNBC is a part.